taking equity out of a house

[Andit]

Long story short - youngest sibling moves in with a parent to care for them and when the parent dies, the other siblings come round demanding their share of the money.

This has happened to 3 friends of mine over the last year or so. Latest is bff - hasn't worked in a number of years to be a full-time caregiver to a parent with Alzheimers. Most of the savings are exhausted (had to fix roof, furnace, etc), but will be eligible for a partial pension in a few months and has a roommate lined up to help defer expenses. Siblings are demanding their share of the house now (i.e. my friend gets 1/3 of the house). Bank has denied bff a loan against the equity in the house (paid off, no liens against it) because bff isn't working.

Are there non-traditional lenders bff can approach? At this point, I'm wondering whether even the cash-for-gold usurious ones might be an option (desperate time & all).

In terms of $, house is worth roughly $675K, so each sibling will get about $225K (depending on expenses, which are to be shared equally).

Any thoughts?


[I'll try not to rant too much about the greedy siblings who haven't lived in the house for 4 decades and barely visited, or the fact they did nothing to help care for their parent, or how caring for an ailing parent made bff's depression get out of control (bff was despondent at the funeral).]

[tjthemanto]

Just selling the house and splitting the money 1/3 , 1/3 , 1/3 with an iron clad agreement with a lawyer ( so no future claims are made ) will be easier. If there is a will, even better.

Banks usually just give a 75 - 80 % equity on the house as a reverse mortgage or equity money in hand. They won't give you 100 %.

Its much easier if its your own house and you are taking the equity out. When you are doing it for someone else, especially a deceased person and that too 3 siblings are involved, things can get quite messy and complicated and the bank probably won't touch that house for giving equity. Too many permissions and Power of Attorney etc needed and things can go back and forth.

[brunt]

Once the parent has passed, then it depends on what makes the most sense. If bff cannot get a loan, then the decision is already made. This is even true if you try to go with alternative lenders as their rates tend to be significantly higher than the banks. Unless bff has family who has a fair bit of cash that they are willing to lend as a mortgage, then they may be out of luck.

I would suggest very heavily against having the two siblings give bff a mortgage on the house. While this may sound appealing, even if the siblings agree to it, the second that they decide that they want the cash from bff, then bff is in the same boat again. Bff does not want to live in this sort of arrangement - not a good thing.

Cutting right to the heart of the matter, a shortage of money is very rarely cured by taking out a loan. This is doubly true if the lack of income is of a long-term, or worse permanent, nature. I would suggest that debt should be avoided.

For instance, a $450,000 loan to pay off the two siblings, even at the ultra-low rate of 4% (which under the circumstances would likely be much lower than can be found, but let's just run with it), would be $18,000 per year in interest alone. That's $1,500 per month. And then there are the property taxes, which I would assume would be in the $6,000 range (another $500 per month). And then there is maintenance, which would also be in the $6,000 range (another $500 per month). That's $2,500 per month without even trying to come up with the full set of housing expenses, let alone eating, clothing, transportation, insurance and so on. If bff does not have an income of at least $40,000 per year, the whole idea is a non-starter. Sorry if I am coming across as heartless, I am just dealing with the cold, hard facts here. I calls them as I sees them.

Sometimes, life stinks. And in those cases, it is generally best to do what needs to be done, and put it behind you. Don't dwell on the unfairnesses, and make the best possible of your situation.
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One warning here about "taking the equity out of a house". That is a phrase that is a nice sounding substitute for the real meaning, being "taking out a loan that if you don't pay it off the lender comes and takes your house". In other words, a loan. With real interest paid and everything. By not calling it a loan, suppliers of these products are hoping that the borrower will not think of it as a loan, but rather a freeing up of money. It's a loan, never forget that.

Same with "reverse mortgage" - it's a loan, plain and simple. The only thing "reverse" about it as compared to a regular mortgage is that after you get the cash, you don't have to make payments. But the interest still accumulates. And it accumulates faster over time as opposed to a regular mortgage, which by virtue of paying it down, having interest accumulating slower over time.
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And as far as "greedy siblings" are concerned, I hold a slightly different view. No, not that the siblings are in the right, but rather that the real problem exists with how the parent drew up the will. Upon death, there is a legal obligation upon the executor/executrix to distribute the estate in accordance with the will. Not what is right, not what somebody thinks how it should be done, but how it is written up. And if there is no will, there is a standard set of rules dictating how things are distributed.

By this way of thinking, if there is a situation that would cause an inherent unfairness (as in this case, where one child made major sacrifices to help an ailing parent in absence of assistance from other children), then it should be addressed, in writing, in the will, before death, not after. The parent, by making a will with an inherent unfairness, is the one in the wrong here, not the siblings. Not to say that the siblings are model citizens, but by law, if they are entitled to a one third share of the house, then they are. As far as the law is concerned, their behaviour is irrelevant, if Mom said they get one third, they get one third.

Once again, sorry if I am coming across as sounding heartless. This is just how the law works, and indeed how it has to work. The estate has to be distributed as dictated in the explicit wishes of the decedent, bff's mother. Any other mechanism would be totally impractical as bickering would go on for years as all surviving members of the family will have radically different views as to what constitutes "fair".

[Ciel]

Andit, I'm sad that you've had to witness 4 cases of caregiving offspring vs the siblings. It would seem that the ailing parent may not have prepared their estate plans to account for the caregiving child's sacrifice and it also seems that one of the offspring is also the estate trustee? Whoever is estate trustee has to deal with the will (it becomes public knowledge when filed with the ON govt)and it can be contested, though the estate trustee is supposed to not be pressured into doing anything by anyone. Estate trustee can choose the lawyer they want to work with in dealing with the estate. The lawyer does not have to be the same one as used to write the will. The estate trustee can also get the estate to pay costs of getting appraisals of things that are valuable as ON wants to know the value of all assets in ON. CRA of course takes an interest in all properties no matter what jurisdication they are in for capital gains taxes.

Brunt's pointed out the costs of keeping the home (even Gail V-O writes about the various costs that must be figured out as monthly homeowning costs). Since the parent in question is deceased, the house is part of an estate. Whoever is estate trustee certified by the ON govt is the executor for the estate. If that person is your friend (designated in the will and accepted role), she needs to work out the various estate matters well before anyone in the family is going to see $$$ in their accounts or possibly as income to declare on the tax return. Also, if she is the executor, she needs to get the estate to pay for executor insurance to protect her during the estate trustee role. If there is no will, anyone taking an interest in the estate could apply for the estate trustee certificate...so your friend needs to know what an executor has to do regarding legal obligations, tax returns, expenses...

BTW, if your friend was considered to be have lived in the home as her principal residence along with the late parent, there is a chance she won't have capital gains to declare on her own personal tax return on her share of the house. There could be other tax outcomes for the other two.

Your friend is likely looking at a house sale to settle estate taxes etc. She needs to get a consultation with a financial planner (an initial consultation may be free) and also an estate lawyer. The intended roommate could be seen as a income for the estate until the house matter is resolved etc.

Also before any beneficiaries can get their share of any residuals of the estate, the Ontario Ministry of Finance gets paid their estate administration taxes based on the valuation of assets, then the CRA via the final personal return (and if there were any investments that generate income, there could be a trust return).

[freefreefree]

Long story short - youngest sibling moves in with a parent to care for them and when the parent dies, the other siblings come round demanding their share of the money.

This has happened to 3 friends of mine over the last year or so. Latest is bff - hasn't worked in a number of years to be a full-time caregiver to a parent with Alzheimers. Most of the savings are exhausted (had to fix roof, furnace, etc), but will be eligible for a partial pension in a few months and has a roommate lined up to help defer expenses. Siblings are demanding their share of the house now (i.e. my friend gets 1/3 of the house). Bank has denied bff a loan against the equity in the house (paid off, no liens against it) because bff isn't working.

Are there non-traditional lenders bff can approach? At this point, I'm wondering whether even the cash-for-gold usurious ones might be an option (desperate time & all).

In terms of $, house is worth roughly $675K, so each sibling will get about $225K (depending on expenses, which are to be shared equally).

Any thoughts?


[I'll try not to rant too much about the greedy siblings who haven't lived in the house for 4 decades and barely visited, or the fact they did nothing to help care for their parent, or how caring for an ailing parent made bff's depression get out of control (bff was despondent at the funeral).]

You know what just tell the parents to tell the siblings saying " back off, I am not dead yet!!!!" This is what my dad tells my brother when he comes around and asking how much he is going to get from him and WHEN! He got so upset and told him, you know what??? I am not dead yet! I still need to live and I need that money to live!!!! So yeah, they shouldn't be asking for their share now!!!! Tell the parent to do a Will and states who gets what and let them know that they will get their share and wait!!! And God hopes that they don't come and kill their parents, so that they can get the money faster!!!!!!!!!

[Ciel]

@freefreefree -you made a good point, the living need to have somewhere to live. The better answer for the father is to tell the one offspring that he's making a will to address the issue for much later. And that the offspring (your brother) should be reviewing his own budgets, income and spending to figure out why he's always asking for money. There is free information offered through events at the library if he does not know where to start.

[Ciel]

@Andit - even if a deep-pocketed neighbour were willing to provide some kind of loan for ownership financing to help your bff out, the problem is that the house is an estate asset unless bff has actual ownership of the house now. Bff would be stuck with all the costs of home ownership and possibly any real estate commissions if sale were necessary after the siblings got their stated value shares. All three should be getting their shares after all taxes/costs are covered. Not before.

[Andit]

Thank you, everyone, for your thoughtful responses.
@tjthemanto
The will split everything evenly, as you mentioned (1/3 to each sibling). Unfortunately, the will was written before the parent got Alzheimers and, due to that dreaded disease, never was changed. The siblings are willing to sign off on any title to the house, as long as they get their cash ($225K minimum).


@brunt
Not to worry about sounding heartless, I am grateful for the insight.

I agree that the will should have been changed years ago - the reason it wasn't addressed was because the parent had Alzheimers and the siblings all agreed that the youngest (bff, who had no dependents, and was willing to give up a good career) could feasibly take on the caregiver role. Neither sibling ever made mention of needing money - in fact, the oldest sibling (the executor of the will) told me at the funeral that bff deserved to inherit everything given all the sacrifices made (I think this is why I sound so annoyed when discussing this).

In terms of costs, bff would have to spend minimum $2K/month for any place to stay in that neighbourhood (where friends & support system is). To complicate matters, bff is a smoker with pets, so finding a place is even more challenging - taking out a loan against the house to pay off siblings and stay in the house is actually the best option (if nothing else, this has helped bff deal with some personal issues and find focus on going back to work).

In terms of lenders, what sort of non-traditional or alternative lender should bff approach? The bank has already said No (might change if bff finds a well-paying job soon, but no guarantees).

You might find this interesting - in Hungary, there is a sort of reverse mortgage program, which allows folks to stay in their homes - the bank gives the individual 70% of the home's worth, then they can live out their lives and when they die or have to go into a nursing home, the bank inherits the home. Some programs give the individual 50% of the home's value and pay a monthly stipend to the individual until they leave the home. Min age is 60 for women, 65 for men (we have relatives who have done this & have stayed in their homes for over a decade now). Not sure if other countries have these programs.

@Ciel
Thanks for the tips on the tax implications. I'll make sure to let bff know and pass on the info to the siblings.



Thanks again, everyone, for responding. I really appreciate the insight.

[tjthemanto]

If the market price is $ 675 K , the bank won't give the full equity in hand. So if each sibling wants 225K, the sibling who is taking care might get less cash and the new loan of the house on top of it.

so the bank might give only $ 500 K as equity or reverse mortgage or home equity line of credit - HELOC..they won't give the full 675 K market price to protect themselves.

so out of this each of the 2 siblings get 225 K each , so 450 K gone, now the third sibling only has 50 K liquid cash in hand , the house ( which is now his ) and a 500 K mortgage/Heloc which he owes to the bank now. Well technically the house will be the banks as they will have the first lien on it for giving him 500 K or whatever the amount might be - 80 % of 675 K, 75 % of 675 K etc, but it won't be 675 K.

sure the house is his now, but its not liquid. he won't have 225 K in hand, it will be much less, plus he will owe 500 K to the bank..the equity money ( reverse mtg ) the bank gave him.

[brunt]

Not to worry about sounding heartless, I am grateful for the insight.

I am glad. I have a habit of putting my "analysis" hat on, and talking about hard facts without any consideration for feelings.

I agree that the will should have been changed years ago - the reason it wasn't addressed was because the parent had Alzheimers and the siblings all agreed that the youngest (bff, who had no dependents, and was willing to give up a good career) could feasibly take on the caregiver role. Neither sibling ever made mention of needing money - in fact, the oldest sibling (the executor of the will) told me at the funeral that bff deserved to inherit everything given all the sacrifices made (I think this is why I sound so annoyed when discussing this).

I jumped on this one because, well, been there, done that.

I won't get into the details, but suffice it to say that we are very sensitive to the situation where one person/couple makes a huge sacrifice from which the rest of the family benefits materially. Sometimes one is forced to make hard decisions for self preservation. We made our hard decisions before the death (relative is still alive), and do not regret our actions in the least.

If eldest sibling truly wants to walk the walk rather than just talk the talk, he is completely free to give his share of the estate to bff. This might also prompt the other sibling to follow through as well. I wouldn't hold my breath though. It is easy to say what should be done, where the wheat gets separated from the chaff is by seeing those who do what should be done.

In terms of costs, bff would have to spend minimum $2K/month for any place to stay in that neighbourhood (where friends & support system is). To complicate matters, bff is a smoker with pets, so finding a place is even more challenging - taking out a loan against the house to pay off siblings and stay in the house is actually the best option (if nothing else, this has helped bff deal with some personal issues and find focus on going back to work).

Sometimes, sentimentality gets in the way. One way to clear it up in this situation would be to reframe the question to something like this - "if this house was not bff's parents' house, would bff pay $675K for it?" This could be an extremely expensive solution to the housing question that is simply being clouded by inertia (the desire to not move) and sentimentality (the desire to remain in the family house). These two factors can be extremely expensive emotions. Try to remove them from big financial decisions.

For instance, is there not another option? Buying a small house for $300K? If smoking is an issue, would it not be best to quit? Just think of the health and monetary benefits!

As I mentioned in the previous post, the costs of remaining in the house are at least $2,500 per month, not to mention that $200,000 correctly invested can spin off $750 per month pretty easily. Renting is given a bad rep, and for no good reason. There are very significant risks to owning, which for some situations simply aren't worth it.

This is without even getting into the issue that a person with small net worth having a leveraged asset worth $675,000 in an overpriced market is a really, really bad idea.

In terms of lenders, what sort of non-traditional or alternative lender should bff approach? The bank has already said No (might change if bff finds a well-paying job soon, but no guarantees).

I am afraid that I think that this is a dead end, plain and simple.

When the bank says "no", this is a clear indication that the loan is viewed as high risk. All alternative lenders take this into consideration when making loans by charging a significantly higher interest rate.

The only alternative, to which I referred in my original post, that I would find palatable would be an individual investor that is currently sitting on piles of money on low interest products like GIC's. They may be interested in a 4% return rather than the 0.8% return that they are currently getting. These sorts of people are a little hard to find though.

Even at the current bank rates, I would be extremely cautious here. Depending on bff's income, this could be a very dangerous path to follow.

You might find this interesting - in Hungary, there is a sort of reverse mortgage program, which allows folks to stay in their homes - the bank gives the individual 70% of the home's worth, then they can live out their lives and when they die or have to go into a nursing home, the bank inherits the home. Some programs give the individual 50% of the home's value and pay a monthly stipend to the individual until they leave the home. Min age is 60 for women, 65 for men (we have relatives who have done this & have stayed in their homes for over a decade now). Not sure if other countries have these programs.

I personally do not have a high opinion of reverse mortgages. Or at least the ones that we have here. Your mileage may vary.
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As a side interest, does bff know that you can apply for GIS (http://www.esdc.gc.ca/en/cpp/oas/gis/index.page)? It is not automatic, you have to apply. It could be worth looking into it.